EU’s Internal Energy Market: Tough Decisions and a Daunting Agenda

June 4, 2013

Europe’s attempts to create a single energy market now stretch back over more than 20 years; it’s been so long it’s an idea that’s in danger of answering a question no longer being asked.

The internal energy market (IEM) was born out of two aims, explains Jorge Vasconcelos, founder of the Council of European Energy Regulators; the first, to liberalise electricity and natural gas markets, so consumers benefit from more competitive prices and the second being the wider one of completing the single market as a whole with the goal of achieving an ever closer union.

The potential economic benefits are enormous. A fully integrated electricity market could save the EU up to €35bn a year by as soon as 2015, compared with 2012, says the European Commission.

But since the beginning of attempts to bring Europe’s energy markets together, the aims have evolved – not least that of including the decarbonising of the European economy – so that the three strands of European energy policy are now to improve competitiveness, security of supply and sustainability.

It’s possible today to see an energy market where all of these aspects have been enhanced – not in Europe but in the U.S., where shale gas has cut energy costs, energy imports and greenhouse gas emissions as utilities switch from coal to gas. European Commission President José Manuel Barroso pointed out not long ago that between 2005 and 2012 the price of gas for EU industrial companies jumped by 35%, while their U.S. counterparts are paying 66% less than in 2005. And electricity prices in Europe have risen by 38%, against a 4% drop in the U.S.

Jean-Michel Glachant of the Florence School of Regulation suggests that, however imperfect, we have the basics of an integrated energy market, a point that the European Climate Foundation’s Johannes Meier and Arne Mogren reinforce.

Yet although energy prices in Europe continue to soar, efforts to integrate markets in the EU seem to have gone backwards, points out Hans ten Berge, EURELECTIC’s Secretary General.

Jerzy Buzek, the former Polish prime minister who has also been president of the European Parliament, says that European countries’ energy markets are poorly interconnected, fragmented and highly concentrated, while the compatibility of national grids remains low. “The market is neither open nor competitive, and it strongly favours the energy industry, disadvantaging consumers”, he warns.

These problems are exacerbated by the biggest economic crisis in the EU’s history, the collapse of carbon prices in its Emissions Trading Scheme (ETS) and the increasingly national focus on energy policies of the member states.

The ETS has “more or less collapsed, with the traded price of carbon too low to change the behaviour of energy generators or consumers – because it has proved all too responsive to the market and to the recession-induced fall in energy demand,” says David Buchan of the Oxford Institute for Energy Studies.

And while some of our contributors, such as Meier and Mogren, argue that “we need a robust carbon price in order to drive the long-term, low-carbon investments that will enable us to decouple growth from fossil fuel consumption and decarbonise the power sector”, Fernand Felzinger of the International Federation of Industrial Energy Consumers (IFIEC) Europe believes that “artificially increasing the CO2 price would reduce our chances of promoting a global decarbonising tool, would further sap the EU’s competitiveness and would send distorted signals to investors”.

Perhaps most worrying of all is what Jean-François Cirelli, Vice-Chairman and President of GDF Suez, calls “the renationalisation of energy policies” which “poses a very real threat to energy investment in Europe”. This trend is reflected in part by the failure in many member states to implement market liberalisation measures and through the introduction of policies that take no account of the wider European market. “There’s an increasing tendency among member states to implement policies that are distinctly different to those of the rest of the EU, whether it is renewable energy support schemes, capacity remuneration mechanisms or energy taxes and regulations on end-user prices,” warns Cirelli.

Hans ten Berge agrees, pointing to the example of Germany, which has unilaterally embarked on its Energiewende policy, “while the UK has proposed an electricity market reform whose measures effectively disregard the implications for other markets”.

This increased national focus at exactly the time when a pan-European approach is so important is complicating the task of integrating more renewable energy into the system. There is a growing acknowledgement that capacity remuneration mechanisms are essential if we are to have the back-up capacity to keep the lights on when the wind isn’t blowing or the sun shining.

Mike Lawn and Jonas Rooze of Bloomberg New Energy Finance write that such measures need to be coordinated at a European level. “National capacity payments, while guaranteeing security of supply in each jurisdiction, discourage further interconnection and suggest that countries do not feel they can rely on their trading partners in the event of a shortfall in power supply.”

Part of the problem, they say, is that national subsidies for renewables, combined with the recession, have now so distorted the wholesale energy market that countries are worried about their ability to ensure future security of supply. The EU needs to push hard to develop cross-border trading of power from renewables to ensure that renewable capacity operates as efficiently as possible.

However, Felzinger argues that capacity payments should be “a last resort” and the focus should instead be on demand management.

For this to happen, Europe needs a much stronger transmission and distribution system – €600bn of the €1 trillion of investment needed between 2010 and 2020 must go to this sector, Commission President Barroso has emphasised.

Decarbonisation in the power sector will reduce flexible, fossil power generation, and replace it with intermittent power generation like wind power. To maintain security of supply, a much stronger European transmission grid will be needed, along with greater flexibility in generation, consumption and storage systems. Market prices will have to be an important driver for this change, explains Statnett’s Auke Lont.

This is true, but what an EU-wide IEM really needs are harmonised policies to create a level playing field for the free flow of electricity supplies across the EU. With the EU’s member states appearing to pull apart rather than closer together, the IEM could prove a source of much greater co-operation. Because it can provide jobs, reduce energy costs for everyone and make it easier to meet EU climate targets it’s a prize worth striving for.